Sustainable investing for young investors

While there have always been investors who have wished to match their money with their values, that was until recently a pretty subjective endeavour, and there was little accountability across the industry as a whole to ensure that companies were operating sustainably.

In recent years, however, environmental, social and governance (ESG) standards have become commonplace measures used to assess how firms operate and hold to account those who demonstrate substandard practices.

As momentum gains behind sustainable investing, it’s becoming easier than ever before to invest sustainably, and to ensure our returns don’t suffer as a result.

Sustainable investing: E, S and G factors

First off, what does ESG really mean? It all sounds very promising, but you might be forgiven for thinking it’s just another three-letter acronym for companies to hide behind.

Each letter stands for a distinct standard against which companies are measured. The “E” is the one people tend to think of first. With climate change such a pressing issue, it’s natural and right that companies are increasingly scrutinized for their environmental impact.

The “S” and “G” have tended to play second fiddle, but the glaring social issues brought to the fore by the coronavirus have in many ways helped them to find their place under the microscope. Companies can no longer neglect their organization’s social credentials, which can include maintaining inclusive workforces and ensuring the correct treatment of consumers. And governance?

ESG screenings help to root out instances of poor governance and force companies to act more responsibly in general, in the knowledge that asset managers will hold them to account.

Whether you care about sustainability or not, there is far more scrutiny of firms’ practices across the board because, in the end, it’s the balance sheet that suffers if firms aren’t up to scratch. You don’t have to be an environmental activist to want sustainable revenue streams.

Your ethical may not be my ethical.

For those of you who do care about sustainability, part of the increased scrutiny of a company’s ESG credentials is the emergence of thematic funds designed to suit investors’ own ethical demands. The attention different funds pay to different sustainable investing qualities means there will be alternative ways to invest in line with your particular set of values.

On one end of the spectrum, managers may exclude entire industries that they deem to be damaging from their funds, while other funds screen for companies that offer meaningful positive impact.

Portfolio managers may, for instance, use a combination of negative and positive screening to uncover the sorts of businesses that meet their fund’s high ESG standards. Once they have excluded ones that they think demonstrate negative behaviour – such as tobacco or gambling firms – they may decide to invest in a company only if it can also demonstrate at least one positive behaviour, such as community investments, or good working practices for gender or racial equality.

This example serves to demonstrate how different funds with their own set of niches and priorities can give us the flexibility to match our investments with our individual outlooks.

Sustainable investing and sustainable returns

At the heart of sustainable investing, we’re looking for companies that are building sustainable futures – companies that have good management and transparent practices, and that are not going to come under fire for not complying with regulations. All of this doesn’t just make for a good set of ethics, it also makes for a good company.

We’ve seen over the course of the COVID-19 pandemic that companies that boast strong ESG factors have tended to outperform those that don’t. As Fidelity’s Jeremy Podger says, “Adopting ESG principles in investment is compatible with – and will likely enhance – the investor’s traditional risk and return objectives.”

As this generation accumulates wealth, companies will be put under more and more pressure to ensure their practices comply with our demands. A Morgan Stanley study found that millennial investors are nearly twice as likely to invest in companies or funds that target social or environmental outcomes, with 86% interested in sustainable investing (compared to 75% among the general population).*

This is a more socially conscious generation, meaning ESG is only likely to grow in prominence as it wields greater influence. And remember: young people are long-term investors. ESG investing is fundamentally all about the long term. It’s there to ensure that both our finances and our society remain sustainable.

Want to learn more about sustainable funds? Check out the following funds from Fidelity: